1/26/2010 @ 6:00AM

Foreign Direct Investment Faces Modest Recovery

The U.N. Conference on Trade and Development highlighted the sharp decline in foreign direct investment in 2009, which affected all regions of the global economy. The data published in its “Global and Regional FDI Trends in 2009″ on Jan. 19 illustrates that drop:

–Sharp decline. Global FDI is estimated to have fallen by 38.7% in 2009. Total flows of 1.0 trillion dollars paled in comparison to the 1.7 trillion recorded in 2008 and the record flows of some 1.8 trillion in 2007, which followed several years of strong global FDI growth.

–Truly global. The global decline of FDI in 2009 followed a drop of 33% in FDI to developed economies in 2008. However, flows to developing and transition countries had remained just positive in 2008. Therefore, in 2009 the downturn in FDI became truly global.

–Similar impact. Developed countries in 2009 registered a fall in FDI of 41.2%, while developing and transition countries had a decline of 34.7% and 39.4% respectively.

–Africa. FDI to Africa experienced a decline of 36.2%, which is likely to be directly resulting in increased unemployment and poverty levels.

–Asia. While a number of Asian economies recovered relatively quickly from the crisis, FDI inflows to South, East and South-east Asia together for 2009 are estimated to have fallen by 32.1%. The FDI downturn was felt more severely in West Asia (including the Middle East), which experienced a drop of 43.1% in the year.

–LAC. In Latin America and the Caribbean, FDI is estimated to have declined by 40.7% in 2009. Brazil experienced a particularly severe decline of 49.5%.

Largest declines. Worldwide, of the 37 large countries for which the U.N. Conference (UNCTAD) reports estimates for 2009 (among the 67 nations that the U.N. agency’s service monitors), the ones that experienced the most severe declines in FDI were mostly European–both Western and Central.

In many of the E.U. countries that suffered heavy declines in FDI inflows, key causes were weak corporate earnings, resulting in a lack of re-investment, and a retreat of “corporate globalization,” manifested as a halt in intra-company loans.

Driver outlook. Despite the strengthening of the current economic recovery, several of the key drivers of cross-border FDI remain weak or are associated with significant risks:

–Economic growth. Economic growth is likely to strengthen only slowly in OECD countries for several years, in contrast to the more dynamic major developing economies.

–Corporate globalization. Developed country corporations are starting to be joined by their counterparts from the large developing nations in seeking investment opportunities outside their home countries.

–Liberalization. As countries grapple with the political consequences of both stimulus packages and higher unemployment rates, the risks of obstacles being placed in the path of foreign investors is rising.

–Corporate earnings. The global recovery of corporate earnings from the recession has been quicker–starting in the second quarter of 2009–and stronger than many expected. However, in the developed world this has been based heavily on cost savings.

–Credit markets. Improvement in credit conditions continues to be gradual overall, and may face significant further setbacks as financial sector regulation is rolled out in the United States and Europe.

Outlook. FDI is likely to recover modestly in 2010, given that uncertainty about the sustainability of the economic upturn remains high. Long-term investors, in particular, will in general remain cautious until it has become clear that key countries’ easing of monetary and fiscal stimulus will not lead to a double-dip recession.